ccar results 3-2012

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Comprehensive Capital Analysisand Review 2012:

Methodology and Results

for Stress Scenario Projections

March 13, 2012

B O A R D O F G O V E R N O R S O F T H E F E D E R A L R E S E R V E S Y S T E M

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Comprehensive Capital Analysisand Review 2012:

Methodology and Results

for Stress Scenario Projections

March 13, 2012

B O A R D O F G O V E R N O R S O F T H E F E D E R A L R E S E R V E S Y S T E M

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I. IntroductionandExecutiveSummary

TheFederalReserveexpectslarge,complexbankholdingcompaniestoholdsufficientcapitalin

ordertomaintainaccesstofunding,tocontinuetoserveascreditintermediaries,tomeettheir

obligationstocreditorsandcounterparties,andtocontinueoperations,evenunderadverseeconomic

conditions. TheComprehensiveCapitalAnalysisandReview(CCAR)isasupervisoryassessmentbythe

FederalReserveofthecapitalplanningprocessesandcapitaladequacyoftheselarge,complexbank

holdingcompanies(BHCs). TheCCARistheFederalReservescentralmechanismfordeveloping

supervisoryassessmentsofcapitaladequacyatthesefirms.

NineteenBHCswererequiredtoparticipateinthisyearsCCAR(CCAR2012).1 InearlyJanuary,

theseBHCssubmittedcomprehensivecapitalplanstotheFederalReserve,describingtheirstrategiesfor

managingtheircapitaloveraninequarterplanninghorizon. ThepurposeofrequiringBHCstodevelop

and

maintain

these

capital

plans

is

to

ensure

that

the

institutions

have

robust,

forward

looking

capital

planningprocessesthataccountfortheiruniquerisksandthattheinstitutionshavesufficientcapitalto

continueoperationsthroughouttimesofeconomicandfinancialmarketstress. Aspartofits

assessmentoftheplans,theFederalReserveprojectedlosses,revenues,expenses,andcapitalratiosfor

eachofthe19BHCsunderaseverelyadversemacroeconomicscenariospecifiedbytheFederalReserve.

Thispaperdescribesthisscenario,providesanoverviewoftheanalyticalframeworkandempirical

methodsusedbytheFederalReservetogeneratethesestressscenarioprojections,andpresentsthe

results.

Theprojections

provide

aunique

perspective

on

the

robustness

of

the

capital

positions

of

these

firmsbecausetheyincorporatedetailedinformationabouttheriskcharacteristicsandbusinessactivities

ofeachBHCandbecausetheyareestimatedusingaconsistentapproachacrossalloftheBHCs. The

FederalReserveisdisclosingthestressscenarioprojectionstoenhancetransparencyaboutthecapital

ofthe19BHCsparticipatingintheCCARexercise. TheFederalReservealsobelievesthatproviding

informationaboutboththeresultsofthestressscenarioprojectionsandthemethodologywillprovide

usefulcontextformarketparticipants,analysts,academics,andotherstointerprettheresults.

ThestressscenarioprojectionswerecalculatedbyFederalReserveanalystsusinginputdata

providedbythe19BHCsandasetofmodelsdevelopedorselectedbytheFederalReserve. The

1TheBHCsthatparticipatedinCCAR2012areAllyFinancialInc.,AmericanExpressCompany,BankofAmerica

Corporation,TheBankofNewYorkMellonCorporation,BB&TCorporation,CapitalOneFinancialCorporation,

CitigroupInc.,FifthThirdBancorp,TheGoldmanSachsGroup,Inc.,JPMorganChase&Co.,Keycorp,MetLife,Inc.,

MorganStanley,ThePNCFinancialServicesGroup,Inc.,RegionsFinancialCorporation,StateStreetCorporation,

SunTrustBanks,Inc.,U.S.Bancorp,andWellsFargo&Company.

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projectionsarebasedonahypothetical,severelyadversemacroeconomicandfinancialmarketscenario

developedbytheFederalReserve,featuringadeeprecessionintheUnitedStates,significantdeclinesin

assetpricesandincreasesinriskpremia,andaslowdowninglobaleconomicactivity(theSupervisory

StressScenario). SixBHCswithlargetrading,privateequity,andderivativesactivitiesarealsosubject

toaglobalfinancialmarketshockonthosepositions.2

TheFederalReservesprojectionsforthe19BHCsundertheSupervisoryStressScenarioshould

notbeinterpretedasexpectedorlikelyoutcomesforthesefirms,butratheraspossibleresultsunder

hypothetical,highlyadverseconditions. Theprojectionsincorporateanumberofconservativemodeling

assumptions. Theprojectionsembedthecapitalactionsissuanceofcapitalinstruments,dividend

payments,andsharerepurchasesthateachBHCincludedinitscapitalplanunderabaselinescenario

reflectingexpectedeconomicconditions. Thatis,BHCsareassumedtomaketheirplanneddividends

and

other

capital

distributions

even

under

the

adverse

conditions

of

the

Supervisory

Stress

Scenario.

ThisconservativeapproachasksifaBHCwouldbeabletomeetsupervisoryexpectationsforcapital

ratiosshouldadverseeconomicconditionsemergeandtheBHCmaintaineditsplannedbaseline

distributions. Toillustratetheimpactofthestressscenarioalone,theFederalReservealsocalculated

stressedregulatorycapitalratiosexcludingplannedcapitalactionsafterQ12012.3 Finally,itis

importanttonotethatthestressscenarioprojectionsestimatetheimpactofadverseeconomicand

financialmarketconditionsoneachinstitutionscapitalresources. Thestressscenarioprojectionsdo

notmakeexplicitbehavioralassumptionsaboutthepossibleactionsofaBHCscreditorsand

counterpartiesin

the

scenario,

except

through

the

Supervisory

Stress

Scenarios

characterizations

of

financialassetpricesandeconomicactivity.

Theresultsofthestressscenarioprojectionssuggestthatthe19BHCsasagroupwould

experiencesignificantlossesundertheassumptionsoftheSupervisoryStressScenario. Lossesatthe19

BHCsareprojectedtototal$534billionovertheninequartersofthescenario,includinglossesacross

theloanportfolios,tradingandcounterpartycreditlossesfromtheglobalfinancialmarketshock,and

lossesonsecuritiesheldintheBHCsinvestmentportfolios. Lossesrelatedtooperationalriskevents

suchasfraud,computersystemsfailure,andemployeelawsuits,andlossesrelatedtomortgage

repurchases,whichareincludedinpreprovisionnetrevenue(PPNR),addanother$115billiontothis

total. ProjectedPPNRatthe19BHCsis$294billionovertheninequartersofthescenario. Together,

2TheseBHCsareBankofAmericaCorporation,CitigroupInc.,TheGoldmanSachsGroup,Inc.,JPMorganChase&

Co.,MorganStanley,andWellsFargo&Company.3TheratiosassumeplannedcapitalactionsthroughQ12012,butnomaterialcapitalissuancesfromMarch16

throughMarch31,2012.

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3

thehighprojectedlossesandlowprojectedPPNRresultinprojectednetincomebeforetaxesof$222

billionforthe19BHCs. Thisisanextremelylowlevelofnetincomerelativetohistoricalexperiencein

theU.S.bankingindustry,eveninperiodsofconsiderableeconomicandfinancialmarketstress.

Thesenetincomeprojectionsresultinsubstantialprojecteddeclinesinregulatorycapitalratios

fornearlyalltheBHCsundertheassumptionsoftheSupervisoryStressScenarioandtheFederal

Reservesconservativepolicyassumptions. AsillustratedinFigure1,theaggregatepoststresstier1

commonratioincludingplannedcapitalactionsforthe19BHCsfallsfrom10.1percentinQ32011to6.3

percentinQ42013.Thispoststresslevelexceedstheaggregatetier1commonratiofortheseBHCsat

thestartofthe2009SupervisoryCapitalAssessmentProgram(SCAP),reflectingthemorethan$300

billionincreaseintier1commonequityattheseBHCssincethattime.

Despitethesometimessignificantprojecteddecreasesformanyofthefirms,mostoftheBHCs

maintain

stressed

regulatory

capital

ratios

including

all

planned

capital

actions

above

regulatory

minimumlevelsoverthecourseofthestressscenariohorizon. Overall,4ofthe19BHCshaveoneor

moreprojectedregulatorycapitalratiosthatfallbelowregulatoryminimumlevelsatsomepointover

thestressscenariohorizon,including3BHCswithastressedratiooftier1commonequitytorisk

weightedassets(thetier1commonratio)thatfallsbelowthe5percentbenchmark. Ininterpreting

theseresults,itisimportanttorecallthattheFederalReservesstressscenarioprojectionsare

deliberatelystringentandconservativeunderhypothetical,adverseeconomicconditionsandtheresults

arenotforecastsorthemostlikelyoutcomesfortheseBHCs.

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II. ComprehensiveCapitalAnalysisandReview

TheCCARisthecentralelementoftheFederalReservesapproachtoensuringthatlargeBHCs

have

thorough

and

robust

processes

for

managing

their

capital

resources,

supported

by

effective

risk

measurementandriskmanagementpractices. InthefirstCCAR,conductedinearly2011,19large,

complexBHCssubmittedcomprehensivecapitalplanstotheFederalReserve,describingtheirstrategies

formanagingtheircapitaloveraninequarterplanninghorizon,andtheFederalReserveevaluated

thesesubmissions.4 These19BHCsarethesameinstitutionsthatparticipatedinthe2009Supervisory

CapitalAssessmentProgram(SCAP).5

InNovember2011,theFederalReserveissuedafinalrulerequiringallU.S.domiciled,toptier

BHCswithconsolidatedassetsof$50billionormoretodevelopandsubmitcapitalplanstotheFederal

4SeeBoardofGovernorsoftheFederalReserveSystem,ComprehensiveCapitalAnalysisandReview: Objectives

andOverview(March18,2011)forafulldescriptionofthe2011CCAR. Thispaperisavailableat

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110318a1.pdf.5Seehttp://www.federalreserve.gov/bankinforeg/scap.htmforadescriptionoftheSupervisoryCapital

AssessmentProgram(SCAP).

0

2

4

6

8

10

12

Actual,4Q08 Stressed,4Q10 Actual,3Q11 Stressed,4Q13

%

Figure1:InitialandStressedTier1CommonCapitalRatios

TargetRatios

SCAP CCAR2012

Note:Aggregateratios for19participatingbankholdingcompanies. Poststressestimatesaresupervisory estimates.

Source:FederalReserve. "TheSupervisoryCapitalAssessmentProgram:OverviewofResults,"May7,2009.

4%

Target

5%

Target

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5

Reserveonanannualbasis(thecapitalplansrule).6 Thisruleappliescurrentlyto30BHCs. CCAR2012

focusedonevaluationandassessmentofthecapitalplanssubmittedbythe19BHCsthatparticipatedin

the2011CCAR,whilethecapitalplansoftheadditional11BHCssubjecttothecapitalplansrulewere

evaluatedinaseparateprocess(seetheboxonpage7).

Consistentwiththecapitalplansrule,theFederalReservesanalysisoftheseplansfocusedon

fourkeyareas:

thecomprehensivenessofthecapitalplan,includingtheextenttowhichtheanalysisunderlyingtheplancapturedandappropriatelyaddressedpotentialrisksstemmingfromallactivities

acrosstheBHCunderbaselineandstressedeconomicconditions;

thereasonablenessoftheBHCsassumptionsandanalysisunderlyingthecapitalplanandtherobustnessofitscapitalplanningprocess;

theBHCscapitalpolicygoverningdistributionsandothercapitalactions;and theBHCsabilitytomaintaincapitalabovespecifiedminimumregulatorycapitalratiosand

abovearatiooftier1commoncapitaltoriskweightedassetsof5percent7underboth

expectedconditionsandstressfulconditionsthroughouttheplanninghorizon.

ThislastassessmentwasbasedonprojectionsofeachBHCslosses,revenue,expenses,and

capitalratiosmadebytheBHCsand,separately,bytheFederalReserve. EachBHCmadefoursetsof

projectionsunderonebaselineandonestressscenariodevelopedbyeachfirm(BHCscenarios)and

onebaselineandonestressscenariodevelopedbytheFederalReserve(supervisoryscenarios).8

Aspart

of

its

review

of

the

capital

plans,

the

Federal

Reserve

generated

its

own

projections

of

theBHCslosses,revenues,expenses,andcapitalratiosunderseverelyadverseeconomicandfinancial

marketconditions. ThesestressscenarioprojectionsarebasedondataprovidedbytheBHCsin

regulatoryreportsandmodelsdevelopedorselectedbyFederalReservestaff,appliedinaconsistent

manneracrossallBHCs. Byexaminingall19BHCssimultaneously,theFederalReservewasableto

enhanceitsinstitutionspecificanalysiswithinformationaboutpeers,applyingconsistentassumptions

676Fed.Reg.74631(Dec.1,2011),tobecodifiedat12CFR225.8;see

http://www.federalreserve.gov/newsevents/press/bcreg/20111122a.htmfor

adescription

of

the

capital

plans

rule. UntilJuly21,2015,thecapitalplansrulewillnotapplytoanyBHCsubsidiaryofaforeignbanking

organizationthatiscurrentlyrelyingonSupervisionandRegulationLetterSR0101issuedbytheBoard(asin

effectonMay19,2010).7The5percentminimumforthetier1commonratioisasupervisoryassessment(derivedfromananalysisof

historicaldataforlargeU.S.BHCs)ofhowmuchcommonequitytheseBHCsneedtoprovideahighdegreeof

confidencethattheycouldwithstandunexpectedfuturelosses.8SomeBHCsoptedtousetheSupervisoryBaselineScenarioastheirownbaselinescenario,andthusmadeonly

threesetsofprojections.

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andbringingacrossfirmperspective. Forthesereasons,theFederalReservesprojectionswouldbe

expectedtodifferfromtheBHCsprojectionsoftheirownperformanceunderthesamesetof

hypotheticaladverseconditionsandwithprojectionsmadebyoutsideanalysts.

TheFederalReservewillnotifyeachBHCofwhetherornottheFederalReservehasany

objectiontoitscapitalplanortotheplannedcapitaldistributionsintheplan.9 BHCsarerequiredto

updateandresubmittheircapitalplanswithin30daysiftheFederalReserveobjectstotheplanorat

anytimebeforethenextCCARexerciseiftheBHCortheFederalReservedeterminesthattherehas

beenamaterialchangeinthefirmsriskprofile,financialcondition,orcorporatestructure. Ifthe

FederalReserveobjectstoacapitalplan,aBHCmaynotmakeanycapitaldistributionsunlessthe

FederalReservespecificallyindicatesitdoesnotobjecttothedistribution.10 TheFederalReservemay

objecttoalldistributionsdescribedintheplan,orjusttosome.

The

decision

to

object

or

not

object

to

a

BHCs

capital

plan

rests

on

the

full

range

of

capital

plan

elementsevaluatedbytheFederalReserve. OneormoreofaBHCscapitalplanelementscouldbe

strong,buttheFederalReservemightstillobjecttothefirmsplanbasedonunacceptableperformance

ononeormoreoftheotherelements. TheFederalReserveassessedeachBHCscapitalplanning

processes,thegovernancestructureguidingthoseprocesses,theriskmeasurementandmanagement

systemssupportingtheseprocesses,aswellasassessmentsofwhethereachBHCismakingsteady

progresstomeetregulatorycapitalstandardsagreedtobytheBaselCommitteeonBankingSupervision

(BaselIII)astheywouldcomeintoeffectintheUnitedStatesovertime. TheBHCsandFederal

Reservesprojections

of

losses,

revenue,

expenses,

and

capital

under

stressed

economic

conditions

thestressscenarioprojectionsareacriticalpartofthisdecision,butnottheonlyconsiderationand

notinallcasesthemostimportantconsideration. ABHCcouldhavestressedcapitalratiosthatremain

aboveregulatoryminimumlevelsandtheFederalReservecouldstillobjectonothergroundstoits

capitalplanandtheplanneddistributionsintheplan.

AsintheSCAP,theFederalReserveisdisclosingtheresultsofitsstressscenarioprojections,

includingfirmspecificresultsbasedontheprojectionsmadebytheFederalReserveofeachBHCs

losses,revenues,expenses,andcapitalratiosovertheplanninghorizon. Thestressscenarioresults

provideadistinctperspectiveonthecapitalstrengthofthesefirmsunderahypotheticalstressed

environmentbecausetheyincorporatedetailedinformationabouttheriskcharacteristics,business

activities,andcurrentandhistoricalperformanceoftheBHCs. Together,theaggregateandBHCspecific

9InCCAR2012,BHCsreceivedthisnotificationbyMarch15,

2012.10

12CFR225.8(d)(4).

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resultsillustratethescaleoftheoverallprojectedoutcomesunderthestressscenarioaswellasthe

degreeofdifferentiationofoutcomesacrossBHCs. Thedisclosuresarealsointendedtoprovide

sufficientinformationtogeneratefeedbackanddiscussionabouttheapproachesusedtogeneratethe

results,withthegoalofimprovingandrefiningtheapproachesovertime.

CapitalPlanReview(CapPR)

The2012CapitalPlanReview(CapPR)isanassessmentofthecapitalplansandproposedcapital

actionsof11bankholdingcompanies(BHCs)withtotalassetsofgreaterthan$50billionthatwerenot

includedintheCCAR.1 Inordertoprovideaconsistentsupervisoryapproach,CapPRattemptedtoleverage

theCCARprocesswhereverpossible. TheFederalReserveaskedeachBHCtosubmitacomprehensivecapital

plan,

with

internal

stress

tests

and

forward

looking

capital

projections

under

four

scenarios:

BHC

baseline,

BHCstress,supervisorybaseline,andsupervisorystress.2

DatasubmissionsrequestedfromtheCapPRBHCswerenotasextensivecomparedwiththeCCAR

submissions. Thisreflectedarecognitionthatthefirmshadnotbeenthroughsuchacoordinatedexercise

beforeandthattimemightbeneededtobuildandimplementtheinternalsystemsnecessarytosatisfythe

rigorousdatacollectionrequirementsneededforaseparatesupervisorystresstest. TheFederalReserve

evaluatedeachCapPRBHCscapitalplansubmission,focusingonthecomprehensivenessoftheplanandthe

strengthoftheBHCscapitalplanningprocesses. Supervisorsconductedquantitativeassessmentstoevaluate

theframework,

approach

and

consistency

of

each

BHCs

stress

test

results,

comparing

results

to

historical

performanceandpeerinstitutions.

TheFederalReservedeliveredasupervisoryresponsetoeachCapPRBHCbasedonanassessmentof

thecomprehensivenessandqualityoftheBHCscapitalplanandtheproforma,poststresscapitalratiosfrom

theBHCsinternalstresstests. TheresultsoftheCapPRprocesswillnotbepubliclydisclosedlargelybecause

theFederalReservedidnotconductanindependentsupervisorystresstestfortheCapPRBHCs.

________________________________________________________________________________

1TheBHCsparticipatinginthe2012CapPRare: BBVAUSABancsharesInc.,BMOFinancialCorp.,CitizensFinancialGroup

Inc.,ComericaInc.,DiscoverFinancialServices,HSBCNorthAmericaHoldingsInc.,HuntingtonBancsharesInc.,M&TBankCorporation,NorthernTrustCorporation,UnionBanCalCorporation,andZionsBancorporation. RBCUSAHoldcoCorp.

wasacquiredbyanotherinstitutionduringtheCapPRprocess.2ThesupervisoryscenariosarethesameasthoseusedintheCCARexercise.

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III. SupervisoryStressScenario

TheSupervisoryStressScenariowasdevelopedbytheFederalReserveandprovidedtothe19

BHCstouseintheprojectionsincludedintheirCCAR2012capitalplans.11 Thescenariowasalso

releasedpublicly. Givencontinuedgeneraleconomicuncertaintyatthetimethatthescenariowas

designedinNovember2011,includingtheongoingsituationinEuropeandcontinuedstressin

mortgagemarkets,theFederalReservebelieveditwasprudenttoprovideanadversescenariothatwas

sufficientlyseveretoensurearigorousassessmentoftheBHCs'abilitytowithstandunexpectedlosses.

TheSupervisoryStressScenariofeaturesadeeprecessionintheUnitedStatesthatbeginsinthefourth

quarterof2011inwhichtheunemploymentrateincreasesbyanamountsimilartothatexperienced,on

average,insevererecessionssuchasthosein19731975,19811982,and20072009,accompaniedbya

notabledeclineinglobaleconomicactivity. Thescenarioalsoassumessevereassetpricedeclineson

domestic

and

global

financial

assets.

Figures2to6illustratethehypotheticaltrajectoriesforsomeofthekeyvariablesdescribing

U.S.economicactivityandassetpricesandglobaleconomicgrowthundertheSupervisoryStress

Scenario. Asthefiguresshow,realGDPisassumedtocontractsharplythroughlate2012,withthe

unemploymentratereachingapeakofjustover13percentinmid2013. Thescenarioassumesthat

U.S.equitypricesfallby50percentfromtheirQ32011valuesthroughlate2012andthatU.S.house

pricesfallbymorethan20percentthroughtheendof2013. ForeignrealGDPgrowthisalsoassumed

tocontract,withgrowthslowdownsinEuropeandAsiain2012.

Itis

important

to

note

that

the

Supervisory

Stress

Scenario

is

not

aforecast,

but

rather

a

hypotheticalscenariotobeusedtoassessthestrengthandresilienceofBHCcapitalinaseverely

adverseeconomicenvironment. TheSupervisoryStressScenario,whileunlikely,representsan

outcomeinwhichtheU.S.economyexperiencesasignificantrecessionandeconomicactivityinother

majoreconomiesalsocontractssignificantly.

Overall,theSupervisoryStressScenarioincludestrajectoriesfor25variables,including13

variablescapturingeconomicactivity,assetprices,andinterestratesintheU.S.economyandfinancial

11InadditiontotheSupervisoryStressScenario,theFederalReservealsodevelopedaSupervisoryBaseline

ScenariothatbroadlyfollowstheconsensusoutlookfromtheBlueChipEconomicIndicatorsandothersourcesas

ofmidNovember2011. TheBHCsparticipatingintheCCAR2012wereinstructedtomakeprojectionsbasedon

boththeSupervisoryStressandSupervisoryBaselinesscenarios,aswellasonstressandbaselinescenariosthat

eachfirmdevelopedindependently(theBHCStressandBHCBaselinescenarios,respectively). SeeFederal

ReserveSystem,ComprehensiveCapitalAnalysisandReview: SummaryInstructionsandGuidance(November

26,2011)availableathttp://www.federalreserve.gov/newsevents/press/bcreg/bcreg20111122d1.pdffor

additionalinformationandforthedetailsoftheSupervisoryBaselineScenario.

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markets,andthreevariables(realGDPgrowth,inflation,andtheU.S./foreigncurrencyexchangerate)in

eachoffourcounties/countryblocks(theeuroarea,theUnitedKingdom,developingAsia,andJapan).

ThescenariostartsintheQ42011andextendsthroughtheQ42014,whichpermitscalculationofthe

ALLLattheendof2013. AppendixAcontainsadescriptionofthevariablesincludedintheSupervisory

StressScenario,aswellasthetrajectoriesforthosevariablesbetweenQ42011andQ42014.

10.0

8.0

6.0

4.0

2.0

0.0

2.0

4.0

6.0

8.0

10.0

8.0

6.0

4.0

2.0

0.0

2.0

4.0

6.0

8.0

Q12009

Q32009

Q12010

Q32010

Q12011

Q32011

Q12012

Q32012

Q12013

Q32013

Q12014

Q32014

Figure2:RealGDPGrowthRateintheSupervisoryStressScenario

(Q/Qseasonallyadjustedgrowthratesannualized,Percent)

Q12009 Q42014

% %

Source:BureauofEconomicAnalysisandFederalReserveassumptionsintheSupervisoryStressScenario

6.0

9.0

12.0

15.0

6.0

9.0

12.0

15.0

Q12009

Q32009

Q12010

Q32010

Q12011

Q32011

Q12012

Q32012

Q12013

Q32013

Q12014

Q32014

Figure3:Unemployment RateintheSupervisoryStressScenario

(Percent)

Q12009 Q42014

%

Source:Bureau

of

Labor

Statistics

and

Federal

Reserve

assumptions

in

the

Supervisory

Stress

Scenario

%

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5,000

7,500

10,000

12,500

15,000

5,000

7,500

10,000

12,500

15,000

Q12009

Q32009

Q12010

Q32010

Q12011

Q32011

Q12012

Q32012

Q12013

Q32013

Q12014

Q32014

Figure4:DowJonesTotalStockMarketIndex,EndofQuarter

Q12009 Q42014

Source:DowJonesandFederalReserveassumptionsintheSupervisoryStressScenario

100

110

120

130

140

150

100

110

120

130

140

150

Q12009

Q32009

Q12010

Q32010

Q12011

Q32011

Q12012

Q32012

Q12013

Q32013

Q12014

Q32014

Figure5:NationalHousePriceIndexintheSupervisoryStressScenario

Q12009 Q42014

Source:CoreLogic(seasonallyadjustedbyFederalReserve)andFederalReserveassumptionsintheSupervisoryStressScenario

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IV.

FederalReserve

Stress

Scenario

Projections

ThissectiondescribestheapproachusedtogeneratetheFederalReservesstressscenario

projectionsoflosses,revenue,expenses,andcapitalpositionsforthe19BHCsparticipatinginCCAR

2012. TheseprojectionsweremadebyFederalReserveanalystsusinginputdataprovidedbythe19

BHCsandmodelsdevelopedorselectedbyFederalReservestaff. Theprojectionsarebasedonthe

SupervisoryStressScenariodevelopedbytheFederalReserve. Thisscenarioisnotaforecast,butrather

ahypotheticalscenariodevelopedtoassessthestrengthandresilienceofBHCcapitalinaparticularly

adverseeconomicandfinancialmarketenvironment. Assuch,theFederalReservesstressscenario

projectionsforthe19BHCsshouldnotbeinterpretedasexpectedorlikelyoutcomesforthesefirms,

butaspossibleresultsunderspecific,hypothetical,severelyadverseconditions. Othertypesofstressful

scenarioswouldbeexpectedtogeneratedifferentsetsofstressresults. Further,becausethe

projectionsarebasedonasetofstandardizedmodelsappliedtoall19BHCs,theywilldifferfrom

projectionsthattheindividualBHCswillmakeoftheirownperformanceunderthesamesetof

hypotheticaladverseconditions.

Theoutputofthestressscenarioprojectionsareestimatesofregulatorycapitalratiosforeach

of

the

19

BHCs

over

the

nine

quarter

forward

looking

stress

scenario

horizon.

The

capital

ratios

include

theratiooftier1capitaltoriskweightedassets(thetier1ratio),theratiooftotalregulatorycapitalto

riskweightedassets(thetotalcapitalratio),theratiooftier1capitaltoaverageassets(thetier1

leverageratio),12andtheratioofthecommonequitycomponentoftier1capitaltoriskweightedassets

12Tier1capital,asdefinedintheBoardsRiskBasedCapitalAdequacyGuidelines,iscomposedofcommonand

20

15

10

5

0

5

10

15

20

20

15

10

5

0

5

10

15

20

Q12009

Q32009

Q12010

Q32010

Q12011

Q32011

Q12012

Q32012

Q12013

Q32013

Q12014

Q32014

Figure6:RealGDPGrowthinFourCountry/CountryBlockAreas

intheSupervisoryStressScenario

(Q/Qseasonallyadjustedgrowthratesannualized, percent)

Q12009 Q42014

EuroArea

Japan

UnitedKingdom

DevelopingAsia

% %

Source: FederalReservecalculationsbasedonofficialsectorsourcesandFederalReserveassumptions intheSupervisoryStress

Scenario. 3Q11data basedonFederalReservecalculationsusingavailable dataasofNovember8,2011

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(thetier1commonratio). Asnoted,thestressscenarioprojectionsaremadeundertheSupervisory

StressScenario,whichincludesquarterlytrajectoriesforU.S.andinternationalmacroeconomicand

financialmarketvariables. ThelasthistoricalperiodintheanalysisisQ32011andcapitalratiosare

projectedquarterlythroughQ42013. Thatis,thestressscenariohorizonistheninequarterperiod

fromQ42011toQ42013.

TheFederalReservesprojectionsassumetheplannedcapitalactionsincludedineachBHCs

capitalplanunderitsownbaselinescenario(BHCBaselineScenario).13

Asaresult,theFederal

Reservesprojectionsdonotincorporateanychangesindividends,sharerepurchases,orissuancesthat

BHCsmightundertakeinreactiontostressedfinancialconditions. Thisconservativeassumptionispart

ofthissupervisoryexerciseandinpracticetheFederalReserveexpectsBHCstofollowthecapital

conservationpoliciesthatarepartoftheircapitalplans. Forexample,thecapitalpoliciesofsomeofthe

BHCs

contain

triggers

or

guidelines

for

reducing

capital

distributions

such

as

dividends

and

share

repurchasesinconditionswhereprofitabilityisreducedand/orcapitalratiosfallbelowcertaininternal

targetlevels.14

TheprojectedstressedcapitalratiosevaluatedinCCAR2012reflectthecombinedimpactofthe

stressscenarioandeachBHCsplannedcapitaldistributions. Toillustratetheimpactofthestress

scenarioalone,theFederalReservealsocalculatedstressedcapitalratiosexcludingcapitalactions

plannedforafterQ12012.15 Theresultingstressedcapitalratioscouldbehigherorlowerthanthose

includingalltheplannedcapitalactions,dependingonwhenthetwominimumvaluesoccur(theycould

comein

different

points

of

the

stress

scenario

horizon),

potential

differences

in

risk

weighted

assets

at

thosepoints,andwhetherthoseplannedactionsrepresentnetadditionsorreductionsinregulatory

capital.

Asapolicymatter,theFederalReservesstressscenarioprojectionsembedanumberof

conservativeassumptionsthat,onnet,arelikelytofurtherreducetheprojectedlevelsofregulatory

noncommonequityelements,someofwhicharesubjecttolimitsontheirinclusionintier1capital.See12CFR

part225,AppendixA,II.A.1. Theseelementsincludecommonstockholdersequity,qualifyingperpetual

preferredstock,certainminorityinterests,andtrustpreferredsecurities. Certainintangibleassets,including

goodwilland

deferred

tax

assets,

are

deducted

from

tier

1capital

or

are

included

subject

to

limits.

See

12

CFR

part

225,AppendixA,II.B.Totalcapitalconsistsoftier1capitalpluscertainsubordinateddebtinstrumentsandthe

allowanceforloanandleaselosses,subjecttocertainlimits.13

Thesecapitalactionsincludebothactionsthataffectcommonequityandactionsthataffectnoncommonequity

capitalelements,suchascertainformsofpreferredstock.14

Seehttp://www.federalreserve.gov/newsevents/press/bcreg/bcreg20111122d1.pdfforamoredetailed

descriptionoftheFederalReservesassessmentofplannedcapitalactionsinCCAR2012.15

TheratiosassumeplannedcapitalactionsthroughQ12012,butnomaterialcapitalissuancesfromMarch16


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13

capitalundertheSupervisoryStressScenario. Theseassumptionsofteninvolvesituationsinwhichthere

isconsiderableuncertaintyabouttheimpactofthehypotheticaladverseeconomicandfinancialmarket

conditionsintheSupervisoryStressScenarioonparticularaspectsoftheBHCsperformance. Insome

cases,thisuncertaintyarisesbecausehistoricaldataprovidelimitedguidanceaboutthelossesor

revenuebeingprojected,whileinothercases,thecurrentstateofmodelingtechniqueandpractice

resultsinlimitationsontheprecisionofindependentsupervisorymodels. Inthesecases,asapolicy

matter,theFederalReserveoptedtoincorporatesimplifying,conservativemodelingassumptionsthat

tendtogeneratehigherprojectionsoflossandlowerprojectionsofrevenue.

TheFederalReservesstressscenarioprojectionsaddresstheongoingsituationinEurope

throughseveralchannels. TheSupervisoryStressScenarioincorporatesahypotheticalsharpdownturn

ineconomicactivityintheEuroarea,andtheglobalfinancialmarketshockappliedtotrading,private

equity,

and

derivatives

positions

of

the

largest

BHCs

includes

very

significant

widening

of

credit

default

swapspreadsforbothEuropeansovereignsandfinancialinstitutionsandsharpincreasesinspreads

acrosstheyieldcurveforEuropeansovereignbonds. Thesestressesaffectmanyaspectsofthestress

scenarioprojections,includingprojectedlossesoninternationallendingportfolios,onsovereignand

financialinstitutionbondsheldintheBHCsinvestmentportfolios,andontrading,privateequity,and

derivativespositions.

IV.AAnalyticalFramework

Thissection

describes

the

analytical

framework

underlying

the

Federal

Reserves

stress

scenario

projections. Thebasicapproachistoprojecttheimpactoftheadverseeconomicenvironmentinthe

SupervisoryStressScenarioonthequarterlynetincomeofeachBHC,andthentocarryforwardthe

impactofnetincomeandeachBHCsplannedcapitalactionsonregulatorycapitalmeasuresinevery

quarterofthestressscenariohorizon. ThisapproachprovidesaperspectiveonthecapitaloftheBHCs

thatisconsistentwithU.S.accounting(GAAP)andregulatorycapitalrulesandontheprimarydriversof

theprojectedchangesincapitalthroughearningsandcapitalactions.

Togenerateprojectionsofnetincomeforthe19BHCs,projectionsaremadeforrevenue,

expenses,andvarioustypesoflossesandprovisionsthatflowintopretaxnetincome,includinglosses

onloansandinvestmentsecurities,lossesgeneratedbyoperationalriskevents,expensesrelatedto

demandsbymortgageinvestorstorepurchaseloansdeemedtohavebreachedrepresentationsand

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14

warrantiesorrelatedtolitigation(mortgagerepurchase/putbacklosses)16,changesintheincome

frommortgageservicingrights(MSRs),and,forBHCswithlargetradingoperations,lossesontrading

andcounterpartypositionsunderasevereshocktoglobalfinancialmarketratesandprices. Projected

netincomeinturnflowsintoacalculationofregulatorycapitalmeasures,takingaccountoftaxesand

deductionsthatlimittherecognitionofcertainintangibleassetsandimposeotherrestrictions,as

specifiedincurrentU.S.regulatorycapitalguidelines.17 Asnotedabove,theprojectedcapitalmeasures

alsoincorporateeachBHCsplannedcapitalactionsunderitsownbaselinescenario. TheBoxonpage

15illustrateshowthevariouselementsofthesecalculationsleadtoprojectednetincomeandthento

projectedchangesinregulatorycapital.

Sincethestressscenarioprojectionsareintendedtoproduceestimatesofregulatorycapital

ratios,thelossandrevenueprojectionsfollowU.S.GAAPandregulatoryguidelines. Thisapproach

captures

differences

in

the

way

that

income

and

losses

are

recognized

based

on

where

assets

are

held

ontheBHCsbalancesheets,generatingsometimesgreatlydifferentlossprojectionsforsimilaror

identicalassetsheldindifferentportfolios. Specifically,lossesonloansheldinaccrualportfoliosare

calculatedascreditlossesduetofailuretopayobligations(cashflowlossesresultinginnetchargeoffs),

ratherthandiscountsrelatedtomarktomarketvalues. Insomecases,BHCsmayhaveloansthatare

beingheldforsaleorthataresubjecttopurchaseaccountingadjustments. Inthesecases,loss

projectionsanticipatethechangeinvalueoftheunderlyingasset,applytheappropriateaccounting

treatment,anddeterminetheincrementalloss. Separatelossprojectionsaremadefordifferent

categoriesof

loans

based

on

the

type

of

obligor

(e.g.,

consumer

or

commercial

and

industrial),

collateral

(e.g.,residentialrealestate,commercialrealestate),orloanstructure(e.g.,revolvingcreditlines).

Thesecategoriesgenerallyfollowthemajorregulatoryreportclassifications,thoughsomeloss

projectionsaremadeformoregranularloancategoriesthanthoseincludedonBHCregulatoryreports.18

Lossesonsecuritiesheldintheavailableforsale(AFS)orheldtomaturity(HTM)accounts

includeotherthantemporaryimpairments(OTTI)forthesepositionsplusestimatesofrealizedgainsor

lossesoncertainsecuritiessales. FollowingU.S.GAAP,OTTIprojectionsincorporateotherthan

temporarydifferencesbetweenbookvalueandfairvalueduetocreditimpairment,butnotdifferences

reflectingchangesinliquidityormarketconditions. Aswiththeaccrualloanportfolio,lossprojections

aremadefordifferentcategoriesofsecuritiesbasedonobligor,collateralorunderlyingcashflow,and

16Theseestimatesareconditionalonthehypotheticaladversemacroeconomic scenarioandonconservative

assumptions. TheyarenotasupervisoryestimateofthecurrentlegalliabilitythatBHCsmightactuallyface.17

Seegenerally,12CFRpart225,AppendixA.18

SeeConsolidatedFinancialStatementsforBankHoldingCompanies(FRY9C).

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15

securitystructure. Thesecategoriesincludevarioustypesofsecuritizedobligations(e.g.,commercial

andresidentialmortgagebackedsecurities),corporatebonds,municipalbonds,andsovereignbonds.

Estimatesofrealizedgainsorlossesonsecuritiessalesarederivedfrominformationprovidedbythe

BHCsonthesaleofsecuritiesundercontractsinplacepriortoSeptember30,2011.

ProjectingNetIncomeandRegulatoryCapital

ChangeinEquityCapital DeductionsfromRegulatoryCapital+Other

AdditionstoRegulatoryCapital

=Change

in

Regulatory

Capital

PPNR+OtherRevenue Provisions AFS/HTMSecuritiesLosses

TradingandCounterpartyLosses OtherLosses(Gains)

=PretaxNetIncomeNote:ChangeintheAllowanceforLoanandLeaseLosses+NetChargeoffs

=Provisions

NetInterestIncome+NoninterestIncome NoninterestExpense

=PreprovisionNetRevenue(PPNR)Note:PPNRincludesLossesfromOperationalRiskEvents,MortgagePutbackLosses,and

OREOCosts

PretaxNetIncome Taxes+ExtraordinaryItemsNetofTaxes

= AftertaxNetIncome

AftertaxNetIncome NetDistributionstoCommonandPreferred

ShareholdersandOtherNetReductionstoShareholdersEquity

=ChangeinEquityCapital

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ForthesixBHCswithlargetradingoperations,lossesontrading,derivatives,andprivateequity

positionsareprojectedassuminganinstantaneousrepricingunderaglobalfinancialmarketshock.

TheglobalfinancialmarketshockwasdevelopedbytheFederalReserveandreflectsaperiodof

significantstressacrossaverybroadrangeofmarketsandassetclassessimilartothatwhichoccurred

duringthesecondhalfof2008,aswellasadditionalstressesrelatedtotheongoingsituationinEurope.

TheglobalfinancialmarketshockisdistinctandseparatefromtheSupervisoryStressScenariointhatit

presumesasetofsevere,instantaneouschangesinmarketrates,prices,andvolatilitiesthatarein

effectlayeredoverthefinancialmarketvariablescontainedintheSupervisoryStressScenario. Losses

relatedtotheglobalfinancialmarketshockareassumedtooccurinthefirstquarterofthestress

scenarioprojections(Q42011). Theselossesincludemarktomarketandincrementaldefaultrelated

lossesoneachofthesixBHCstradingandprivateequitypositions,aswellaschangesincreditvaluation

adjustments

(CVA)

for

counterparty

exposures.

It

is

important

to

capture

the

impact

of

counterparty

creditriskbecauseprojectedmarktomarketlossesonthetradingaccountcanbereducediftrading

positionsarehedged,buttheeffectivenessofthesehedgesdependsoncounterpartyperformanceon

theobligations. Thisimpactiscapturedthroughthestressappliedtocounterpartycreditexposures.

Preprovisionnetrevenue(PPNR)iscalculatedasprojectednetinterestincomeplusnon

interestincomeminusnoninterestexpense. ConsistentwithU.S.GAAP,PPNRprojectionsofnon

interestexpenseincorporateprojectedlossesrelatedtooperationalriskeventssuchasfraud,computer

systemorotheroperatingdisruptions,oremployeelawsuits;repurchaseandlitigationexpensesrelated

toresidential

mortgages;

projected

changes

in

income

from

mortgage

servicing

rights;

and

expenses

relatedtothedispositionofforeclosedproperties(otherrealestateowned(OREO)expenses).

Projectednetincomeincorporatesprovisionsintotheallowanceforloanandleaselosses

(ALLL). ProvisionsaredeterminedsothattheALLLisatanappropriatelevelattheendofeachquarter

givenprojectedloanlossesinthatquarter,wheretheappropriateleveloftheALLLisafunctionof

projectedfutureloanlosses. ThiscalculationcouldleadeithertoadrawdownoftheALLL(anALLL

release,increasingnetincome)ortheneedtobuildtheALLL(anadditionalprovision,decreasingnet

income)duringthequarter. TotalprovisionsintotheALLLarecalculatedasprojectedloanlossesforthe

quarterplusorminustheamountneededfortheALLLtobeatanappropriatelevelattheendofthe

quarter.

TheFederalReservesforwardlookingprojectionsofincomeandlossesmayincludetheeffects

ofplannedmergersoracquisitionsortheinitiationofnewbusinesslinesoractivitiesthatwereincluded

intheBHCscapitalplansandaresubjecttopriorapprovalornoticebytheFederalReserveorother

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17

supervisors. Theinclusionoftheeffectsofsuchplannedactionsdoesnot,andisnotintendedto,

expressaviewonthemeritsofsuchproposalsandisnotanapprovalornonobjectiontothem.

ThefinalprojectionofpretaxnetincomeequalstheprojectionofPPNRminusprovisionsminus

projectedlossesonsecuritiesandlossesfromtheglobalfinancialmarketshock(forthesixBHCswith

largetradingoperations)minuslossesonloansheldforsaleandmeasuredunderthefairvalueoption.

Pretaxnetincomeprojectionsalsoincorporateonetimerevenuesandexpensesandgoodwill

impairmentcharges,asprojectedbytheBHCsintheircapitalplans. Aftertaxnetincomeiscalculated

byapplyingaconsistenttaxratetopretaxnetincomeforallBHCs. AlongwitheachBHCsplanned

capitalactions(dividendpayments,repurchasesorredemptions,andissuanceofcommonequityor

othercapitalinstruments),aftertaxnetincomeistheprimarydriverofprojectedchangesinequity

capital,whichinturndrivesprojectedchangesintheregulatorycapitalmeasuresthatarethefinal

output

of

the

Federal

Reserves

stress

scenario

projections.

Capital

ratios

are

calculated

using

average

totalassetsandriskweightedassetsthatarebasedonprojectionsmadebytheBHCsaspartoftheir

CCAR2012capitalplansubmissionsundertheSupervisoryStressScenario.

IV.BModelingDesignandImplementation

TheFederalReservesstressscenarioprojectionsarebasedoninputdataprovidedbythe19

BHCsparticipatinginCCAR2012andonmodelsdevelopedorselectedbyFederalReservestaffand

reviewedbyanindependentgroupofFederalReserveeconomistsandanalysts. Themodelsare

intendedto

capture

the

impact

of

the

macroeconomic

and

financial

market

factors

included

in

the

SupervisoryStressScenarioandcharacteristicsoftheBHCsloansandsecuritiesportfolios;trading,

privateequity,andderivativespositions;businessactivities;andotherfactorsaffectinglosses,revenue,

andexpenses. ThissectiondescribestheinputdataprovidedbytheBHCsandtheapproachtheFederal

Reservetookindesigningandimplementingthesemodels.

BHCInputDataThe19BHCsparticipatinginCCAR2012wererequiredtosubmitextensivedatatotheFederal

Reserveonaseriesofregulatoryreports.19 ThereportscaptureinformationontheBHCsloanand

securitiesportfoliosasofSeptember30,2011,includingborrowercharacteristics,collateral

19ThesereportformsaretheFRY14QandFRY14Areports,whichcanbefoundat

http://www.federalreserve.gov/reportforms/formsreview/FRY14Q_20111216_f.pdf and

http://www.federalreserve.gov/reportforms/formsreview/FRY14A_20120118_f.pdf.

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characteristics,characteristicsoftheloansorcreditfacilities,amountsoutstandingandyettobedrawn

down(forcreditlines),andpaymenthistoryandcurrentstatus. Insomecases(primarilyretailcredit

portfolios),aggregatedinformationisreportedbasedonsegmentsoftheloanportfolios(e.g.,segments

definedbyloantovalue(LTV)ratio,geographiclocation,andborrowercreditscore),whileinother

cases,informationiscollectedonindividualloansorcreditfacilities. ForsecuritiesheldintheAFSand

HTMportfolios,informationiscollectedattheindividualsecurity(CUSIP)level,includingtheamortized

cost,marketvalue,andanyOTTItakenonthesecuritytodate.

Additionalreportscollectinformationontradingandderivativespositions,privateequity

holdings,andcertainotherassetssubjecttofairvalueaccountingheldbyBHCswithlargetrading

operations. ThesereportscollectBHCestimatedsensitivitiesofthesepositionstothesetofriskfactors

specifiedbytheFederalReserve,includingchangesinawiderangeofU.S.andglobalfinancialmarket

rates

and

asset

prices,

and

volatilities

and

correlations

of

those

rates

and

prices.

The

specific

risk

factors

arethosejudgedtobemostrelevanttothepositionsheldbytheBHCs. Thereportsalsocollect

informationontheestimatedsensitivityoftheBHCscounterpartyrelatedprofitorlosstotheserisk

factors,bothforsegmentsoftheportfolioandforindividuallargecounterparties. Thesedataareused

inprojectinglossesrelatedtotheglobalfinancialmarketshock,includinglossesrelatedtoderivatives

andothercounterpartyexposures. Thesedatawerecollectedforpositionsinthetradingandprivate

equityportfoliosheldbytheBHCsasofmarketcloseonNovember17,2011.20

Afinalsetofreportscollectsinformationonhistoricalandprojectedrevenuesandoperating

andother

non

credit

related

expenses

for

each

BHC.

This

information

includes

data

on

net

interest

income,noninterestincome,andexpensesbybusinessline,aswellasaseriesofmetrics(balances,

volumesoftradesandtransactions,assetsundermanagement,feeschedules,compensationexpenses)

relatedtoarangeofbusinessactivitiesconductedbytheBHCs. DataarealsocollectedontheBHCs

historicallossesrelatedtooperationalriskevents. Thesedata,bothhistoricalandtheBHCsprojections

oftheseamountsoverthestressscenariohorizon,wereusedindevelopingtheFederalReserves

projectionsofPPNRforthe19BHCs. Finally,thereportscollectinformationontheBHCsprojectionsof

riskweightedassets,balancesheetcomposition,andcapitaloverthestressscenariohorizon.

All19BHCsparticipatinginCCAR2012wererequiredtosubmittheseregulatoryreportstothe

FederalReservebyeitherlateDecember(forformscontainingdetailedloanandsecuritiesportfolio

20TheBHCswereinformedoftheportfoliodatefortheglobalmarketriskanalysiswhentheCCAR2012

instructionswerereleasedonNovember22,2011.

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19

information)orearlyJanuary(forformscontainingBHCderivedestimates).21 BHCswererequiredto

submitdetailedloanandsecuritiesportfolioinformationforallmaterialportfolios,wherematerial

wasdefinedasthoseportfoliosexceedingeither5percentoftier1capitalor$5billionandtheportfolio

categoriesweredefinedontheregulatoryreports. Forportfoliosfallingbelowthesethresholds,the

BHCshadtheoptiontosubmitornotsubmitthedetaileddata. PortfoliosforwhichtheFederalReserve

didnotreceivedetaileddatawereassignedalossrateequaltoahighpercentileofthelossrates

projectedforBHCsthatdidsubmitdataforthatcategoryofloanorsecurity. Forinstanceswhere

certaindataelementswerereportedasmissingvalues,thesemissingdatawerefilledinwith

conservativevalues(e.g.,highLTVvaluesorlowcreditscores)basedontheremainderoftheportfolio.

Thestressscenarioprojectionsmayincludetheeffectsofplannedmergersoracquisitionsorthe

initiationofnewbusinesslines,asreportedbyBHCsintheirCCAR2012capitalplans. BHCswith

significant

planned

mergers

or

acquisitions

provided

available

information

on

the

characteristics

of

the

institutionsorportfoliostobeacquired. Asnotedabove,theinclusionoftheeffectsofsuchplanned

actionsdoesnotandisnotintendedtoexpressaviewonthemeritsofsuchproposalsandisnotan

approvalornonobjectiontothem.

Loss,Revenue,andExpenseModelsThedatacollectedfromtheBHCs,alongwiththevariablesdefiningtheSupervisoryStress

Scenario,areinputsintoaseriesofmodelsusedtoprojectlosses,revenues,andexpensesforeachBHC

overthe

stress

scenario

horizon.

In

most

cases,

these

models

were

either

developed

by

Federal

Reserve

analystsandeconomistsorarevendordevelopedmodelsusedbyFederalReservestaff. Insomecases,

however,thestressscenarioprojectionsofcertaintypesoflossesorrevenuemadebytheFederal

ReserverelyonsensitivitiesgeneratedbytheBHCsusingtheirinternalriskmeasurementmodelsoron

modeledestimatesprovidedbytheBHCs,alongwithsupportingdocumentation,andassessedand

adjustedbyFederalReserveanalysts. Thesearecasesinwhichindependentsupervisorymodelsare

eithernotyetsufficientlyrobusttogeneratereliableestimatesoraretechnicallyandlogistically

extremelydifficulttoimplement.22

21Specifically,theBHCswererequiredtosubmittheFRY14Qreports(containing,amongotheritems,detailed

loanandsecuritiesportfolioinformation)byDecember15,2011. TheBHCswererequiredtosubmittheFRY14A

reports(containing,amongotheritems,theBHCderivedestimates)byJanuary9,2012.22

Theprimaryexamplesaremodelsdesignedtocapturetheimpactofchangestoglobalfinancialmarketratesand

pricesontrading,privateequity,andderivativespositions,wheredevelopingfullyindependentrevaluationmodels

thatcancapturetherangeofcomplexinstrumentsandpositionsheldbytheBHCsisanextremelydifficult

undertaking,andmodelsthatcancapturetheBHCspecificfactorsdeterminingthevariouselementsofPPNR.

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Ingeneral,themodelsweredevelopedusingpooledhistoricaldatafrommanyfinancial

institutions,eithersupervisorydatacollectedbytheFederalReserveordatapurchasedfromindustry

dataaggregators. Themodelsarethusindustrymodelsinthesensethattheestimatedparameters

reflectthetypicalorindustryaverageresponsetovariationinthemacroeconomicandfinancialmarket

variablesandportfoliospecificandinstrumentspecificcharacteristics,ratherthanbeingtailoredtothe

waythateachindividualBHCslosses,revenues,orexpensesmightrespondtothesefactors. This

approachreflectsnotonlythedifficultyofestimatingseparate,statisticallyrobustmodelsforeachof

the19BHCs,butalsothedesirenottoassumethathistoricalBHCspecificresultswillprevailinthe

futurewhenthoseresultscannotbeexplainedbyconsistentlyobservablevariablesincorporatedintoa

robuststatisticalmodel. Thus,BHCspecificfactorsareincorporatedthroughthedetailedportfolioand

businessactivitydatathatareinputstothemodels,butthereactionfunctionstothesevariablesandto

the

macroeconomic

and

financial

market

factors

defined

in

the

Supervisory

Stress

Scenario

are

the

same

forallBHCs. ThismeansthatthestressscenarioprojectionsmadebytheFederalReservewillnot

necessarilymatchormirrorsimilarprojectionsmadebyindividualBHCs,whichwillincorporatediverse

approachestocapturingtheimpactofportfoliocharacteristicsandeconomicfactors.

ThemodelsdevelopedinternallybytheFederalReservedrawonacademicliteratureand

industrypracticeinmodelingtheimpactofborrower,instrument,andcollateralcharacteristicsand

macroeconomicfactorsonlosses,revenue,andexpenses. Theapproachesbuildonworkdonebythe

FederalReserveintheSCAPandthe2011CCAR,butinmanycasesrepresentsignificantrefinementand

advancementof

that

work,

reflecting

advances

in

modeling

technique,

richer

and

more

detailed

data

overwhichtoestimatethemodels,andlongerhistoriesofperformanceinbothadverseandmore

benigneconomicsettings. Themodelswerereviewedbyanindependentmodelreviewteamcomposed

ofeconomistsandanalystsfromacrosstheFederalReserveSystem,withafocusonthedesignand

estimationofthemodels. Inaddition,FederalReserveanalystsdevelopedindustrywidelossandPPNR

projectionscapturingthepotentiallossandrevenuegeneratingratesofthebankingindustryasawhole

inastressedmacroeconomicenvironment,foruseasreferencepointsinassessingmodeloutputs

acrossthe19BHCs.

ThemodelsusedinthestressscenarioprojectionsaredescribedingreaterdetailinAppendixB.

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21

V. StressScenarioProjections

ThissectionpresentstheFederalReservesstressscenarioprojections. Asdescribedabove,

theseresultsarebasedonprojectionsoflosses,revenues,expenses,andcapitalmadebyFederal

ReserveanalystsusinginputdatasuppliedbytheBHCsandasetofmodelsdevelopedorselectedbythe

FederalReserve.TheprojectionsofBHCperformancearebasedonanunlikely,hypotheticaladverse

economicscenario(theSupervisoryStressScenario),whichassumesadeeprecessionintheUnited

States,asignificantslowdowninglobaleconomicactivity,andsharpfallsinassetpricesandincreasesin

riskpremia. TheprojectedstressedcapitalratiosevaluatedinCCAR2012embedtheplannedcapital

actionsfromeachBHCsCCAR2012capitalplan. Theseratiosaretheresultsofaconservativepolicy

assessmentoftheBHCsabilitytomaintaintheirplannedbaselinecapitaldistributionsevenifeconomic

conditionsweretodeterioratesignificantly. Toillustratetheimpactofthestressscenarioalone,the

Federal

Reserve

also

calculated

stressed

regulatory

capital

ratios

excluding

planned

capital

actions

after

Q12012.23

Thesectionbeginsbypresentingthestressedcapitalratiosthetier1common,tier1capital,

totalcapital,andtier1leverageratiosoverthestressscenariohorizon. Thesectionthendescribesthe

projectionsoflossesonloans,securities,andtrading,privateequity,andderivativesexposures,bothin

theaggregateandforindividualBHCs. Thefinalpartofthesectionthenreportsprojectionsofpre

provisionnetrevenueandnetincome.

Theseresultsarepresentedbothintheaggregateforthe19BHCsandforindividualBHCs. The

aggregateresults

provide

asense

of

the

stringency

of

the

stress

scenario

projections

and

the

sensitivity

oftheseBHCsasagrouptoadverseeconomicconditionsassumedintheSupervisoryStressScenario.

TherangeofresultsacrossindividualBHCsreflectsdifferencesinbusinessfocus,assetcomposition,

revenueandexpensesources,aswellasdifferencesinportfolioriskcharacteristics,leadingto

differencesinoverallperformanceunderthehypotheticaladverseeconomicscenario. Inaddition,the

stressedcapitalratioprojectionsreflectdifferencesinplannedcapitalactionsacrosstheBHCs. The

comprehensiveresultsforindividualBHCsarereportedinAppendixC.

V.A StressedRegulatoryCapitalRatios

Thestressscenarioprojectionssuggestsignificantdeclinesinregulatorycapitalratiosfornearly

alltheBHCsundertheassumptionsoftheSupervisoryStressScenarioandtheFederalReserves

23TheratiosassumeplannedcapitalactionsthroughQ12012,butnomaterialcapitalissuancesfromMarch16


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22

conservativeassumptions,includingthoseaboutplannedcapitalactions. Overall,thetotalamountof

tier1commoncapitalheldbythe19BHCsisestimatedtofallbymorethan$300billion,orabout40

percent,fromQ32011toyearend2013undertheSupervisoryStressScenarioandincludingallplanned

capitalactionsoverthisperiod. AsshowninTable1,theweightedaveragevaluesofallfourregulatory

capitalratiosdeclineoverthecourseofthestressscenariohorizon,withyearend2013levelsranging

from2.7percentagepointsto4.5percentagepointslowerthanatthestartofthestressscenario

horizon. Thethreeratiosbasedonriskweightedassets(thetier1commonratio,tier1ratio,andtotal

capitalratio)declinemoreonaveragethanthetier1leverageratio. Table2presentstheseratiosfor

eachof19BHCs.

Table3showstwoestimatesoftheminimumtier1commonequityratioduringtheSupervisory

StressScenarioforeachofthe19BHCs. Theleftcolumnshowstheminimumratioassumingnocapital

actions

after

Q1

2012.

The

right

column

shows

the

minimum

ratios

with

all

proposed

capital

through

Q4

2013,asinthesubmittedcapitalplanthatisbeingevaluatedbytheFederalReserveinCCAR2012.

NotethattheseminimumratiosmayoccurindifferentquartersacrosstheBHCsandindifferent

quartersforaparticularBHCacrossthetwocolumns,soonecannotmakeaccurateinferencesaboutthe

sizeortimingofthenetcapitalactionsbycomparingthesecolumns.

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Actual

Stressedratiosassumingno

capitalactions

afterQ12012(1)

Q32011 Q42013 Minimum Minimum

10.1 6.3 6.2 6.8

12.3 7.8 7.6 8.4

15.5 11.2 11.0 11.7

7.4 4.7 4.6 5.1

741 438

907 540

1,139 770

7,356 6,904

12,188 11,482

PreProvisionNetRevenue(2)

OtherRevenue(3)

less

Provisions

RealizedLosses/GainsonSecurities (AFS/HTM)

TradingandCounterpartyLosses(4)

OtherLosses/Gains(5)

equals

NetIncomebeforeTaxes

LoanLosses(6)

FirstLienMortgages

JuniorLiens andHELOCs

Commercial andIndustrial

Commercial RealEstate

CreditCards

OtherConsumer

OtherLoans

ProjectedCapitalRatiosthroughQ42013

UndertheHypotheticalSupervisoryStressScenario

Comprehensive CapitalAnalysis andReview2012

Table1:FederalReserveEstimatesintheSupervisory StressScenario

19ParticipatingBankHoldingCompaniesTheseprojectionsrepresenthypotheticalestimatesthatinvolveaneconomicoutcomethatismoreadversethanexpected. These

estimatesarenotforecastsofexpectedlosses,revenues, netincomebeforetaxesorcapitalratios. ThetwominimumcapitalratiospresentedbelowarefortheperiodQ42011throughQ42013anddonotnecessarilyoccurinthesamequarter.

Stressedratioswithall

proposedcapitalactions

throughQ42013

Tier1CommonCapitalRatio(%)

Tier1CapitalRatio(%)

TotalRiskBasedCapitalRatio(%)

Tier1LeverageRatio(%)

ProjectedLosses,Revenue andNet IncomebeforeTaxesforQ42011throughQ42013

UndertheHypotheticalSupervisory StressScenario

Billionsof

Dollars

Percentof

AverageAssets

294 2.5

2

ProjectedLoan

Losses

by

Type

of

Loans

for

Q4

2011

through

Q4

2013

UndertheHypotheticalSupervisory StressScenario

324

31

116

45

222 1.9

Billions of

Dollars

PortfolioLoss

Rates(%)

341 8.1

62 7.4

26 5.9

15 2.5

56 13.2

67 8.2

24 5.2

(1)AssumesplannedcapitalactionsthroughQ12012,butassumingnomaterialcapitalissuancesfromMarch16throughMarch31,

2012.

(6)Commercial andindustrialloansincludesmallandmediumenterpriseloansandcorporatecards. Averageloanbalances usedto

calculateportfoliolossratesexcludeloansheldforsaleandloans heldforinvestmentunderthefairvalueoption.

Source:FederalReserveestimatesintheSupervisoryStressscenario.

Tier1CommonCapital($B)

Tier1Capital($B)

TotalRiskBasedCapital($B)

RiskWeightedAssets($B)

AverageTotalAssets($B)

(2)PreProvisionNetRevenueincludes lossesfromoperational riskevents,mortgageputbackexpenses,andOREOcosts.

(3)OtherRevenueincludes onetimeincomeand(expense) itemsnotincluded inPreProvisionNetRevenue.

(4)TradingandCounterpartyincludes marktomarketlosses,changesincreditvaluationadjustments(CVA)andincrementaldefault

(5)OtherLosses/Gainsincludes projectedchangeinfairvalueofloansheldforsaleandloans heldforinvestmentmeasuredunderthe

fairvalueoption,andgoodwillimpairmentcharges.

Notes:ThetwominimumcapitalratiospresentedherearefortheperiodQ42011throughQ42013anddonotnecessarilyoccurinthe

samequarter. Capitalactions includecommondividends,commonsharerepurchases,andcommonshareissuance. Averagebalances

usedforprofitablity ratiosandportfoliolossratesareaveragesovertheninequarterperiod. Estimates maynotsumpreciselydueto

rounding. Aggregateratiosareweightedaverages.

92 17.2

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25

BankHoldingCompany

Minimumstressedratios

assumingnocapitalactions

afterQ12012(1)

Minimumstressedratios

withallproposedcapital

actionsthroughQ42013

AllyFinancialInc. 2.5 2.5

AmericanExpressCompany 12.4 10.8

BankofAmericaCorporation 5.7 5.9

TheBankofNewYorkMellonCorporation 13.3 13.0

BB&TCorporation 7.3 6.4

CapitalOneFinancialCorporation 7.2 7.8

CitigroupInc. 5.9 4.9

FifthThirdBancorp 7.7 6.3

TheGoldman

Sachs

Group,

Inc. 5.8 5.7

JPMorganChase&Co. 6.3 5.4

Keycorp 6.3 5.3

MetLife,Inc. 5.4 5.1

MorganStanley 5.4 5.4

ThePNCFinancialServicesGroup,Inc. 6.6 5.9

RegionsFinancialCorporation 5.7 6.6

StateStreetCorporation 15.1 12.5

SunTrustBanks,Inc. 5.5 4.8

U.S.Bancorp 7.7 5.4

WellsFargo&Company 6.6 6.0


ComprehensiveCapitalAnalysisandReview2012

Table3:EstimatesofMinimumTier1CommonRatios,Q42011throughQ42013

Theminimumstressedratios(%)arethelowestquarterlyratiosfromQ42011toQ42013intheSupervisory

Stressscenario. TheleftcolumnshowsminimumratiosassumingnocapitalactionsafterQ12012. Theright

columnshowsminimumratioswithallproposedcapitalactionsthroughQ42013. Minimumratiosmayoccur

indifferentquartersacrosstheBHCs,andindifferentquartersforeachBHCacrossthetwocolumns.

Notes:Capitalactionsincludecommondividends,commonsharerepurchases,andcommonshareissuance.

(1)AssumesplannedcapitalactionsthroughQ12012,butnomaterialcapitalissuancesfromMarch16through

March31,2012.

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26

ThechangesinstressedregulatorycapitalratiosvaryconsiderablyacrossBHCs(seeFigures7

and8). Overall,stressedregulatorycapitalratiosincludingallplannedcapitalactionsdeclinedoverthe

courseofthestressscenariohorizonforallbutoneoftheBHCs.

Despitesometimessignificantprojecteddecreases,mostoftheBHCsmaintainstressed

regulatorycapitalratiosincludingallplannedcapitaldistributionsaboveregulatoryminimumlevelsover

thecourseofthestressscenariohorizon.24 Overall,4ofthe19BHCshaveoneormoreprojected

regulatorycapitalratios(includingcapitaldistributions)thatfallbelowregulatoryminimumlevelsat

somepointoverthestressscenariohorizon,including3BHCswithastressedratiooftier1common

ratiobelowthe5percentbenchmarkestablishedinthecapitalplansrule. Ininterpretingtheseresults,

itisimportanttorecallthattheFederalReservesstressscenarioprojectionsaredeliberatelystringent

and

conservative

assessments

under

hypothetical,

adverse

economic

conditions

and

the

results

are

not

forecastsorthemostlikelyoutcomesfortheseBHCs.

Thestressedcapitalratiosincorporateprojectedlevelsoftotalaverageassetsandriskweighted

assetsoverthestressscenariohorizon,basedonprojectionsprovidedbytheBHCsintheircapitalplans.

Projectedriskweightedassetsfallbyabout$450billion,or6.1percent,fromthebeginningtotheend

ofthestressscenariohorizon(seeTable1). TheFederalReservesprojectionsoflossesandPPNRreflect

theprojectedgrowthorshrinkageofriskweightedassetsforeachBHC. Thismeansthatprojected

changesinriskweightedassetsandtotalassetsdonotalwayshaveastraightforwardimpacton

projectedstressed

capital

ratios.

24TheminimumlevelsforBHCstobeconsideredadequatelycapitalizedare4percentforthetier1ratio,8percent

forthetotalcapitalratio,and3or4percentforthetier1leverageratio. BasedontheU.S.capitaladequacy

guidelines,thetier1leverageminimumis3percentforBHCswithacompositeBOPECratingof"1"andforBHCs

thathaveimplementedtheBoardsriskbasedcapitalmeasureformarketrisk. Thetier1leverageminimumis4

percentforallotherBHCs. Thetier1leverageratiominimumis4percentforAllyFinancialInc.,AmericanExpress

Company,CapitalOneFinancialCorporation,andMetLife,Inc.,and3percentfortherestofthe19BHCs

participatinginCCAR2012. ThecapitalplansrulefurtherstipulatesthattheBHCsmustdemonstratetheirability

tomaintaintier1commonratiosabove5percent.

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27

0.0

3.0

6.0

9.0

12.0

15.0

0.0

3.0

6.0

9.0

12.0

15.0

Ally

A

mEx

BofA

BNYM

B

B&T

Cap

One

Citi

FifthThird

Gold

man

J

PMC

Key

Corp

Me

tLife

MorganSta

nley

PNC

Regions

Sta

teSt

SunTrust

USB

W

ells

Figure7:MinimumTier1CommonRatiointheSupervisoryStressScenario(%)%


%

Median=5.9%

3.0

0.0

3.0

6.0

9.0

12.0

15.0

18.0

3.0

0.0

3.0

6.0

9.0

12.0

15.0

18.0

Ally

AmEx

BofA

BNYM

BB&T

CapOne

Citi

FifthThird

Goldman

JPMC

K

eyCorp

MetLife

Morgan

Stanley

PNC

Regions

StateSt

SunTrust

USB

Wells

Figure8:Changefrom3Q11toMinimumTier1CommonRatio

intheSupervisoryStress Scenario(%)Changefrom3Q11

toMinimum

MinimumRatio

%


%

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V.B ProjectedLosses

TheFederalReservesstressscenarioprojectionssuggestthatthe19BHCsasagroupwould

experiencesignificantlossesundertheassumptionsoftheSupervisoryStressScenario. Thestress

scenarioresultsinclude$534billioninprojectedlossesforthe19BHCsintheaggregateoverthenine

quartersofthestressscenariohorizon. Theselossesinclude$341billioninaccrualloanportfoliolosses,

$31billioninOTTIandotherrealizedsecuritieslosses,$116billionintradingandcounterpartylossesat

thesixBHCswithlargetradingportfolios,and$45billioninadditionallossesfromitemssuchasloans

measuredunderthefairvalueoption(lossesontheseloanswerecalculatedbasedontheglobal

financialmarketshock,consistentwiththetreatmentoffairvaluedpositionsinthetradingportfolio)

andgoodwillimpairmentcharges. Table1presentstheseresultsintheaggregate,whileTable4

presentsthemindividuallyforeachofthe19BHCs.

The

biggest

sources

of

loss

are

losses

on

the

accrual

loan

portfolios

and

trading

and

counterpartylossesfromtheglobalfinancialmarketshock. Together,thesetwoaccountfor85percent

ofthe$534billioninprojectedlossesforthe19BHCsundertheSupervisoryStressScenario.

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LoanLossesProjectedlossesonconsumerrelatedlendingresidentialmortgages,creditcards,andother

consumerloansrepresent69percentofprojectedloanlossesand44percentoftotalprojectedlosses

forthe19BHCs(seeFigure9andTable1). Thisisconsistentwithboththeshareofthesetypesofloans

intheBHCsloanportfoliostheseloansrepresent55percentoftheaccrualloanportfolioatthese

firmsasofQ32011andwiththeassumptionsoftheSupervisoryStressScenario,whichfeaturesvery

highunemploymentratesandsignificantfurtherdeclinesinhousingprices. Lossesonresidential

mortgageloans,includingbothfirstliensandjuniorliens/homeequity,arethesinglelargestcategory,at

$118billion,representingnearly35percentoftotalprojectedloanlosses. Projectedlossesoncredit

cardlendingat$92billionisthesecondlargestsegment,representingmorethan25percent.

Projectedlossesoncommercialandindustrialloans,at$67billion,isthenextlargestcategory.

Forthe

19

BHCs

as

agroup,

the

nine

quarter

cumulative

loss

rate

on

the

accrual

loan

portfolio

is

8.1percent,wherethelossrateiscalculatedastotalprojectedloanlossesovertheninequartersofthe

stressscenariohorizondividedbyaverageloanbalancesoverthehorizon. Thisrateisveryhighby

historicalstandards,moreseverethananyU.S.recessionsincethe1930s. AsillustratedinFigure10,

FirstLien

Mortgages,62

Tradingand

Counterparty

Losses,116

CreditCards,92Commercialand

IndustrialLoans,

67

SecuritiesLosses

(AFS/HTM),31

JuniorLiens

and

HELOCs,

56

CommercialRealEstate

Loans,24

OtherConsumerLoans,26

OtherLoans,15OtherLosses,

45

Figure9:ProjectedLossesintheSupervisoryStressScenario($B)


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totalloanlossratesvarysignificantlyacrossBHCs,rangingbetween0.9and11.4percentacrossthese

institutions.

ThedifferencesintotalloanlossratesacrosstheBHCsreflectdifferencesinloanportfolio

compositionand

differences

in

risk

characteristics

for

each

type

of

lending

across

these

firms.

Loan

portfoliocompositionmattersbecauseprojectedlossratesvarysignificantlybyloantype.25 Nine

quartercumulativelossratesrangebetween2.5percentonotherloansand17.2percentoncredit

cards,reflectingbothdifferencesintypicalperformanceoftheseloanssomeloantypestendto

generatehigherlosses,thoughgenerallyalsohigherrevenueanddifferencesinthesensitivityof

lendingtotheassumptionsoftheSupervisoryStressScenario. Inparticular,lendingcategorieswhose

performanceissensitivetounemploymentratesorhousingpricesmayexperiencehighstressedloss

ratesduetotheconsiderablestressassumedforthesefactorsintheSupervisoryStressScenario.

Figures11to17presenttheninequartercumulativelossratesonsevendifferentcategoriesof

loansforeachofthe19BHCs. TherearesignificantdifferencesacrossBHCsinprojectedloanlossrates

forsimilartypesofloans. Forexample,whilethemedianprojectedlossrateonfirstlienresidential

mortgagesis6.3percent,theratesvariedfromalowof0.7percenttoahighof9.7percent. Similarly,

25TheloancategoriesaredefinedtobegenerallyconsistentwithcategoriesontheFRY9Creports.

0.0

3.0

6.0

9.0

12.0

0.0

3.0

6.0

9.0

12.0

Ally

AmEx

BofA

BNYM

BB&T

CapOne

Citi

FifthThird

Goldman

JPMC

KeyCorp

MetLife

MorganStanley

PNC

Regions

StateSt

SunTrust

USB

Wells

Figure10:TotalLoanLossRatesintheSupervisoryStressScenario(%)%


%

Estimatesareforninequarterperiodfrom4Q11to4Q13asapercentofaveragebalances.

Median=7.1%

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forcommercialandindustrialloans,therangeofprojectedlossrateswasfrom1.6to10.9percent,with

amedianof7.0percent. Projectedlossratesonmostloancategoriesshowsimilardispersionacross

BHCs.

DifferencesinprojectedlossratesacrossBHCsprimarilyreflectdifferencesinloan

characteristics,suchasloantovalueratioordebtservicecoverageratio,andborrowercharacteristics,

suchascreditratingorFICOscore. Inaddition,someBHCshavetakenwritedownsonportfoliosof

impairedloanseitherpurchasedoracquiredthroughmergers. Projectedlossesontheseloansare

madeusingthesamelossmodelsusedforotherloansofthattype,andtheresultinglossprojectionsare

thenreducedbytheamountofsuchwritedowns. FortheseBHCs,projectedlossrateswillbelower

thanforBHCsthatholdsimilarloansthathavenotbeensubjecttopurchaserelatedwritedowns.

0.0

3.0

6.0

9.0

12.0

0.0

3.0

6.0

9.0

12.0

Ally

AmEx

BofA

BNYM

BB&T

CapOne

Citi

FifthThird

Goldman

JPMC

KeyCorp

MetLife

MorganStanley

PNC

Regions

StateSt

SunTrust

USB

Wells

Figure11:

First

Lien

Mortgages

Loss

Rates

in

the

Supervisory

Stress

Scenario

(%)%


%


Median=6.3%

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0.0

4.0

8.0

12.0

16.0

20.0

24.0

0.0

4.0

8.0

12.0

16.0

20.0

24.0

Ally

AmEx

BofA

BNYM

BB&T

CapOne

Citi

F

ifthThird

Goldman

JPMC

KeyCorp

MetLife

Morga

nStanley

PNC

Regions

StateSt

SunTrust

USB

Wells

Figure12:JuniorLiensandHELOCsLossRatesintheSupervisoryStressScenario(%)%


%


Median=11.5%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Ally

AmEx

BofA

BNYM

BB&T

CapOne

Citi

FifthThird

Goldman

JPMC

KeyCorp

MetLife

Mor

ganStanley

PNC

Regions

StateSt

SunTrust

USB

Wells

Figure13:CommercialandIndustrialLossRatesintheSupervisoryStressScenario(%)%


%

Estimatesareforninequarterperiod from4Q11to4Q13asapercentofaveragebalances.

Median=7%

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34

0.0

4.0

8.0

12.0

16.0

20.0

24.0

0.0

4.0

8.0

12.0

16.0

20.0

24.0

Ally

AmEx

BofA

BNYM

BB&T

CapOne

Citi

FifthThird

G

oldman

JPMC

KeyCorp

MetLife

Morgan

Stanley

PNC

Regions

StateSt

SunTrust

USB

Wells

Figure14:CommercialRealEstateLossRatesintheSupervisoryStressScenario(%)%


%

Estimatesareforninequarterperiod from4Q11to4Q13asapercent ofaveragebalances.

Median=5.5%

0.0

4.0

8.0

12.0

16.0

20.0

24.0

0.0

4.0

8.0

12.0

16.0

20.0

24.0

Ally

AmEx

BofA

BNYM

BB&T

CapOne

Citi

FifthThird

Goldman

JPMC

KeyCorp

MetLife

Morg

anStanley

PNC

Regions

StateSt

SunTrust

USB

Wells

Figure15:CreditCardLossRatesintheSupervisoryStressScenario(%)%


%


Median=15.5%

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0.0

4.0

8.0

12.0

16.0

20.0

24.0

0.0

4.0

8.0

12.0

16.0

20.0

24.0

Ally

AmEx

BofA

BNYM

BB&T

CapOne

Citi

FifthThird

Goldman

JPMC

KeyCorp

MetLife

MorganStanley

PNC

Regions

StateSt

SunTrust

USB

Wells

Figure16:OtherConsumerLossRatesintheSupervisoryStressScenario(%)%


%


Median=3.6%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Ally

AmEx

BofA

BNYM

BB&T

CapOne

Citi

FifthThird

Goldman

JPMC

KeyCorp

MetLife

Morg

anStanley

PNC

Regions

StateSt

SunTrust

USB

Wells

Figure17:OtherLoansLossRatesintheSupervisoryStressScenario(%)%


%

Estimatesareforninequarterperiod from4Q11to4Q13asapercentofaveragebalances.

Median=2.4%

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LossesonTrading,PrivateEquity,andDerivativesPositionsThestressscenarioresultsinclude$116billionintradingandcounterpartycreditlossesfrom

theglobalfinancialmarketshockatthesixBHCswithlargetrading,privateequity,andderivatives

activity. Tradingandcounterpartycreditlossesrangebetween$7billionand$28billionacrossthesix

BHCs(seeTable4),withthelargestlossesatthoseBHCswiththemostsignificanttradingactivities.

Evenso,therelativesizeoflossesacrossfirmsdependsnotonnominalportfoliosize,butratheronthe

specificriskcharacteristicsofeachBHCstradingpositions,inclusiveofhedges. Itisalsoimportantto

notethatprojectedlossesrelatedtotheglobalfinancialmarketshockarebasedonthetradingpositions

heldbythesefirmsonasingleday(generally,November17,2011),andthatprojectedlossescouldhave

differed,perhapssignificantly,basedontradingpositionsfromadifferentdate.

Someportionoftradingandcounterpartycreditlossesweredrivenbytheaspectsoftheglobal

financial

market

shock

designed

to

capture

the

on

going

situation

in

Europe.

These

aspects

include

significantassumedhypotheticalincreasesincreditspreadsonEuropeansovereignandfinancial

institutionobligors,resultinginpricelevelsthatwouldbesignificantlybelowanyobservedinthe

historicaldata. Itisdifficulttoisolatetheimpactoftheseaspectsoftheglobalfinancialmarketshock

ontradingandcounterpartylosses,giventhecorrelationbetweenthesechangesinEuropeanrelated

riskfactorsandotherelementsoftheassumedglobalfinancialmarketshock,aswellastheoften

complexnatureoftheriskexposuresandrelatedhedgesintheseBHCstrading,privateequity,and

derivativesportfolios. Still,focusingnarrowlyonshockstoEuropeanrelatedriskfactors,thelargest

impactis

on

counterparty

credit

risk

losses.

Direct

mark

to

market

losses

on

trading

positions

related

to

theseshockswererelativelysmallduetohedgingofthesepositions.

V.C ProjectedPPNRandNetIncome

Intheaggregate,the19BHCsareprojectedtogenerate$294billioninpreprovisionnet

revenuecumulativelyovertheninequartersofthestressscenariohorizon,equalto2.5percentof

averageassetsforthesefirms(seeTable1). Theserelativelysevereresultsreflectlowlevelsofnet

interestincomeduetotheimpactoftheSupervisoryStressScenarioslowinterestrate,flatyieldcurve

environmentgiventheBHCs'currentandprojectedbalancesheetcomposition. Theresultsalsoreflect

lowlevelsofnoninterestincome,consistentwiththefallingassetpricesandsharplycontracting

economicactivityassumedinthescenario. Inaddition,thePPNRprojectionsincorporateelevated

levelsoflossesfromoperationalriskeventssuchasfraud,employeelawsuits,orcomputersystemor

otheroperatingdisruptionsandexpensesrelatedtoputbacksofmortgages,nettedagainstreserves

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alreadytakenbytheBHCs.26 PPNRprojectionsalsoincorporatetheincrementalimpactoftherecent

mortgagerelatedsettlementbetweenseveraloftheCCARBHCsandstateandfederalauthorities;

foregoneinterestexpenseswereestimatedforotherBHCsengagedinmortgageservicingthatwerenot

partofthesettlement.

TheratioofprojectedcumulativePPNRtoaverageassetsvariesacrossBHCs(seeFigure18and

Table4). Asignificantportionofthisvariationreflectsdifferencesinbusinessfocusacrossthe

institutions. Forinstance,theratioofPPNRtoassetstendstobehigheratBHCsfocusingoncreditcard

lending,reflectingthehighernetinterestincomethatcreditcardsgenerallyproducerelativetoother

formsoflending.27 TheratiotendstobeloweratBHCsactiveinareasotherthanlendinganddeposit

taking,suchascapitalmarket,insurance,andsecuritiesprocessingactivities. Someportionofthe

variationalsoreflectsmoregranularBHCspecificfactorsaboutthecompositionandnatureoftheir

business

activities,

such

as

the

sensitivity

of

certain

forms

of

fee

income

or

likely

volume

of

market

wide

activityundertheconditionsassumedintheSupervisoryStressScenario. LowerPPNRratesdonot

necessarilyimplylowernetincome,however,sincethesamebusinessfocusandrevenuerisk

characteristicsdrivingdifferencesinPPNRacrossfirmscouldalsoresultinoffsettingdifferencesin

projectedlosses.

ProjectedPPNRandlossesaretheprimarydriversofprojectednetincome. Table1presents

aggregateprojectionsofthecomponentsofpretaxnetincome,includingprovisionsintotheALLLand

onetimeincomeandexpenseandextraordinaryitems,undertheSupervisoryStressScenario. Thetop

panelof

Table

4presents

these

projections

for

each

of

the

19

BHCs.

The

projections

are

cumulative

for

theninequartersofthestressscenariohorizon.

26Theseestimatesareconditionalonthehypotheticaladversemacroeconomic scenarioandonconservative

assumptions. TheyarenotasupervisoryestimateofthecurrentlegalliabilitythatBHCsmightactuallyface.27

Asnoted,creditcardlendingalsotendstogeneraterelativelyhighlossrates,sothehigherPPNRratesatthese

BHCsdonotnecessarilyindicatehigherprofitability.

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Ofnote,followingU.S.GAAP,thenetincomeprojectionsincorporateloanlossesindirectly

throughprovisions,whicharecalculatedasprojectedloanlossesplusanyadditionalprovisionorminus

anyALLLreleaseneededfortheALLLtobeatanadequatelevelattheendofeachquarter. The$324

billionintotalprovisionsreportedinTable1istheresultof$341billioninnetchargeoffsand$17

billionin

net

reserve

releases

from

the

ALLL.

These

releases

occur

because,

in

the

aggregate,

the

level

oftheALLLsuggestedbytheFederalReservesALLLalgorithmislowerattheendofthestressscenario

horizonthanatthebeginning. Thelowerlevelreflectsboththemorepositiveeconomicenvironment

for2014assumedintheSupervisoryStressScenario,whichgenerateslowerlevelsofprojectedfuture

netchargeoffs,andthehighlevelofloanlossesprojectedtooccurduringtheninequarterhorizon,

whichinpartreflectsacceleratedrecognitionoflossesinherentintheloanportfolio.

TheFederalReservesprojectionsofpretaxnetincomeundertheSupervisoryStressScenario

implynegativenetincomeatmanyofthe19BHCsindividually,andfortheBHCsasagroup,overthe

ninequarterstressscenariohorizon. AsTable1shows,projectednetincomebeforetaxes(pretaxnet

income)is $222billionoverthestressscenariohorizonforthe19BHCs,equalto 1.9percentof

averageassetsforthegroup.

Figure19illustratestheratioofpretaxnetincometoaverageassetsforeachofthe19BHCs.

Theratiorangesbetween 5.2percentand4.8percent. Projectedcumulativenetincomeformostof

3.0

0.0

3.0

6.0

9.0

12.0

15.0

3.0

0.0

3.0

6.0

9.0

12.0

15.0

Ally

AmEx

BofA

BNYM

BB&T

CapOne

Citi

FifthThird

Goldman

JPMC

KeyCorp

MetLife

MorganStanley

PNC

Regions

StateSt

SunTrust

USB

Wells

Figure18:PPNRRatesintheSupervisoryStressScenario(%)%


%


Median=2%

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theBHCs(16of19)isnegativeoverthestressscenariohorizon. Differencesacrossthefirmsreflect

differencesinthesensitivityofthevariouscomponentsofnetincometotheeconomicandfinancial

marketconditionsassumedintheSupervisoryStressScenario. ProjectednetincomeforthesixBHCs

withlargetradingoperationsisalsoaffectedbytheimpactoftheglobalfinancialmarketshockontheir

trading,privateequity,andderivativespositions,introducingsomeadditionalvariationinprojectednet

incomebetweenthesesixBHCsandtheotherfirmsparticipatinginCCAR2012.

8.0

6.0

4.0

2.0

0.0

2.0

4.0

6.0

8.0

6.0

4.0

2.0

0.0

2.0

4.0

6.0

Ally

AmEx

BofA

BNYM

BB&T

CapOne

Citi

FifthThird

Goldman

JPMC

KeyCorp

MetLife

MorganStanley

PNC

Regions

StateSt

SunTrust

USB

Wells

Figure19:PreTaxNetIncomeRatesintheSupervisoryStressScenario(%)%


%


Median= 1.6%

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AppendixA

SupervisoryStressScenario

ThisAppendix

provides

adescription

of

the

Supervisory

Stress

Scenario

provided

by

the

Federal

Reserve.

ItisimportanttonotethattheSupervisoryStressScenarioisnotaforecastbutrathera

hypotheticalscenariotobeusedtoassessthestrengthandresilienceofBHCcapitalinaseverely

adverseeconomicenvironment. TheSupervisoryStressScenario,whileunlikely,representsan

outcomeinwhichtheU.S.economyexperiencesasignificantrecessionandeconomicactivityinother

majoreconomiesalsocontractssignificantly.

Thescenariostartsinthefourthquarterof2011andextendsthroughthefourthquarterof

2014,whichpermitsthecalculationofloanlossreservesattheendof2013. Thescenarioisdefined

over25variables. ForthedomesticU.S.variables,thescenarioincludes:

Fivemeasuresofeconomicactivityandprices:RealandnominalGrossDomesticProduct(GDP),theunemploymentrateoftheciviliannoninstitutionalpopulationaged16andover,nominal

disposablepersonalincome,andtheConsumerPriceIndex(CPI);

Fouraggregatemeasuresofassetpricesorfinancialconditions:TheCoreLogicNationalHousePriceIndex,theNationalCouncilforRealEstateInvestmentFiduciaries CommercialRealEstatePrice

Index,theDowJonesTotalStockMarketIndex,andtheChicagoBoardOptionsExchangeMarket

VolatilityIndex;

and,

Fourmeasuresofinterestrates:therateonthethreemonthTreasurybill,theyieldonthe10yearTreasurybond,theyieldona10yearBBBcorporatesecurity,andtheinterestrateassociatedwitha

conforming,conventional,fixedrate,30yearmortgage.

Fortheinternationalvariables,thescenarioincludesthreevariablesinfourcountries/countryblocks.

Thethreevariablesforeachcountry/countryblockarethepercentchangeinrealGDP,thepercentchangeintheConsumerPriceIndexorlocalequivalent,andtheU.S./foreigncurrencyexchange

rate.

Thefourcountries/countryblocksincludedaretheeuroarea,theUnitedKingdom,developingAsia,andJapan. Theeuroareaisdefinedasthe17EuropeanUnionmemberstatesthathaveadopted

theeuroastheircommoncurrencyanddevelopingAsiaisdefinedastheaggregateofChina,India,

HongKong,andTaiwan.

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SupervisoryStressScenario

OBSRealGDP

growth

Nominal

GDPgrowth

ccar results 3-2012

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